Sunday, November 4, 2012

BSE Sensex and NSE Nifty 50 index chart patterns – Nov 2, 2012

BSE Sensex index chart

Last week’s trading was influenced by RBI’s announcement of a 25 bps (0.25%) cut in the CRR ratio but status quo on repo and reverse repo rates. Market players were obviously disappointed and the index dropped sharply on Tue. Oct 30 ‘12. FIIs took the opportunity to book profits.

Better sense prevailed during the rest of the week as realisation dawned that the CRR cut would inject more liquidity into the banking system. The index closed the week at its highest level in 4 weeks. Another attempt to test the resistance zone between 19000 and 19800 appears imminent.

Will the resistance zone get breached on the upside? May be not just yet – unless the FIIs and DIIs both buy together. So far, they have been working at cross purposes – one buying and the other selling. A slew of PSU divestments have been lined up, which may divert DII buying attention. LIC has booked huge profits in anticipation.

The uptrend (marked by the blue uptrend line) on the weekly chart of Sensex is intact. The 20 week and 50 week EMAs are both rising with the index trading above them. The nascent bull market is under no immediate threat.

Weekly technical indicators are looking bullish. MACD is positive and above its rising signal line, though it hasn’t started moving up yet. ROC is also positive and has stopped falling, but remains below its 10 week MA. RSI has started rising inside its overbought zone. Slow stochastic dropped to the edge of its overbought zone, but is showing signs of turning up.

The correction/consolidation of the past 4 weeks provided an entry opportunity for those who didn’t enter earlier. If you are still waiting for much lower levels predicted by some analysts, you are likely to miss the bus altogether.

NSE Nifty 50 index chart

The upcoming elections in Gujarat and Himachal has led to accusations, counter-accusations and mud-slinging by different political parties. This is not unusual and provides decent entertainment.

Leaders at the helm of Congress and BJP – the two main parties in the election fray – are facing serious corruption charges. The electorate has to decide between the lesser of two evils – which is a sad commentary on the state of Indian democracy 65 years after independence.

In spite of the single day’s ‘flash crash’ visible on the daily bar chart of Nifty, the uptrend in the index is intact. Last week’s trading was characterised by a ‘false’ break down below the 100 points trading range within which the Nifty had been trading for the past 4 weeks.

Why ‘false’? Is it because the Nifty has climbed back inside the trading range? Partly yes. But more importantly, Nifty fell less than 1% below the lower edge of the trading range. This is the reason for following the 3% ‘whipsaw’ rule.

Unless an index (or a stock) breaches a support or resistance level by more than 3% on a closing basis (i.e. not an intra-day breach), the breach remains subject to a ‘whipsaw’. This is exactly what happened on the Nifty chart.

There is another interesting point to note. After receiving good support from the 50 day EMA, Nifty has moved above its 20 day EMA with a gap, backed by decent volumes. That opens up the possibility of a break out above the upper edge of the rectangular trading range.

Daily technical indicators are showing signs of turning around, but haven’t turned bullish yet. MACD is still below its signal line in positive territory. ROC is touching its 10 day MA just below the ‘0’ line. Both RSI and slow stochastic have risen to touch their 50% levels.

Nifty is just below the long-term resistance zone between 5750 and 6000 (refer last week’s closing weekly chart), and may struggle a bit before it can move higher.

Bottomline? Chart patterns of BSE Sensex and NSE Nifty 50 indices gave ‘false’ break downs below narrow trading ranges, before moving back inside their trading ranges. There are good possibilities of upward break outs in a pre-Diwali rally. Continue to add/accumulate good quality stocks, but maintain suitable stop-losses.

(Note: If you don’t know how to identify ‘good quality stocks’, you can pre-register to subscribe to my paid Monthly Newsletter. New subscriptions will be offered in Jan. 2013.)